While there are few people who would have seen the recent property revolution happening in Romania there is no doubting that the last few years have made many people a great deal of money. Locals, developers and foreign investors have all had a hand in the rise and rise of Romanian property, but has it all come to an end? Or do the fundamentals of last year still hold strong?
The new look Romania
While the addition of Romania as a new member of the EU on 1st January 2007 was a major stepping stone towards the new look Romania of today, the truth is that interest in the country started as soon as the government announced plans to integrate into the European movement. We saw many forecasting the riches this would bring and the massive infrastructure grants. For the EU it was a chance to snatch a former hard line communist country and place it in the bosom of Europe, further strengthening the EU against the former powerhouse of the USSR.
In basic terms Romania is the 9th largest member of the EU by territory and 7th largest by population and while it joined the EU with the lowest level of income per member of the population there have been great strides in this and many other areas.
Property market fundamentals of 2007
The move into the EU produced the now customary burst of economic activity and large foreign investment which had actually started in the 1990s after a number of fundamental changes to the way Romania was run. Very quickly Romania was one of the fastest growing economies in the EU and everything in the garden was rosy.
While there was another burst of foreign investment upon the joining of the EU the truth was that all areas of the Romanian economy had started to benefit from 2001 onwards. Foreign investment rose from just over £3 billion in 2005 to over £6 billion in 2006 and demand was getting stronger and stronger.
Like so many of the ex-communist countries which had for years been under state control there was a major problem with inflation as the move from a state controlled market to a free market economy continued to progress. We saw a massive attack on inflation by the authorities which saw it fall from over 22% in 2002 to under 4% in 2007 with experts forecasting a sustained period of low inflation.
As Romania continued to grow and attract more and more interest from overseas investors we saw the creation of new markets within the economy and the historically high level of unemployment came crashing down. The figure is now down to around the 6% level and while it may increase a little after the current slowdown, much progress has been made on this front.
EU funding has always been a great carrot by which to attract more and more countries into the table and Romania was no different. The former war torn country is set to receive tens of billions of pounds of EU funding to improve the country’s infrastructure, public services and regulations. The fact that this funding program will last until at least 2013 offers something to fall back on in troubled times.
Like so many new and exciting additions to the EU it seems that more and more tourists are looking to sample the delights of Romania and see what has been hidden away from the rest of the world for so long. Many countries such as Romania have a culture which has been kept under raps for too long and one which is proving very magnetic to ever more inquisitive European travellers.
In order to ensure that growth throughout Romania would continue as long as possible, and the number of foreign investors would increase, the government introduced one of the lowest rates of tax in the EU for both individuals and corporations. While the tax rate, which was as low as 16% in 2005, will not stay low forever it has played a major part in the growth of Romania.
What is happening today?
Prior to the credit crunch taking hold of the Romanian property market it seemed as though everyone had exposure to property. Romanian property companies were making money faster than they could spend it and even the humble population of Romania were in the property market making a quick turn acquiring properties and selling them on to desperate foreign investors. Many places were seeing 30% a year growth in property prices and at the height of the marker many estate agents used to change their prices intra-day as demand was so high.
However, when the financial crisis sweeping across the world finally broke through the Romania defences there was a swift realisation that it was hard to justify the current property prices, markets had moved to fast and prices were out of synch with the underlying economic outlook. Reality started to hit home, buyers went on strike, banks cut back on the money available to the markets and prices started to fall.
Thankfully the Romanian property market received a large dose of reality before it was too late. While there will be much pain for many in the short term, especially those who over extended their finances, the long term position is still fairly intact. Once the economic environment calms down we should see a return to a more sustainable level of economic activity although some are still suggesting up to 15% per annum growth in property prices which is hard to sustain.
The economy may be under pressure at the moment, tourists may well be staying away just now but we now know the building blocks are there for the future growth in the Romanian economy and property market. This ongoing shake out could turn out to be a positive turning point as it will still be fresh in the minds of many as and when the property market leaves its sick bed.
A good old dose of reality can make such a difference in the longer term and guard against a return to a boom and bust property market – well at least for the next few years until memories fade again.